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* Irish banks sufficiently capitalised, but no buffer
* Banks urged to move more quickly to repossess buy-to-let
DUBLIN, March 14 (Reuters) - Irish banks must engage more directly with borrowers who are struggling to pay their mortgages but they should avoid widespread debt forgiveness, the country’s central bank governor said on Wednesday.
The number of problem mortgages in Ireland grew sharply in the last three months of 2011, with nearly one in seven Irish home loans not being fully repaid, raising fears about the sufficiency of bank capital to weather the storm.
Getting the balance right between writing off loans and putting too much pressure on struggling borrowers is of “immense national importance,” Central Bank Governor Patrick Honohan said in a speech to the Limerick Law Society.
Honohan said Irish banks are sufficiently capitalized to deal with the problem but could not afford another major writedown or provide substantial support for home-loan debts.
“Although the banks have been provided with enough capital to allow for loan modifications in respect of loans that are clearly unaffordable, unnecessary debt forgiveness could quickly erode that buffer, placing a further burden on the government finances, which they are in no condition to absorb,” he said.
The central bank governor added that banks should be less inhibited about repossessing buy-to-let investment properties whose owners are unable to repay debt.
The government in January announced the framework of a new non-judicial route for homeowners struggling to pay their mortgages to discharge their debt and an easing of bankruptcy rules.
But Honohan urged banks on Wednesday to engage with troubled borrowers early and directly rather than using the new system.
“Early engagement, fair procedures, tailored forbearance or rescheduling adapted to individual debtor circumstances ... are watchwords in the development of a sufficient response. That has not yet been achieved by the banks,” he added.
The Central Bank is to review its code of conduct for mortgage arrears to avoid hampering engagement with borrowers. The current rules limit the number of unsolicited communications each month from the bank to the borrower.
Almost 100 billion euros ($130.26 billion) of mortgage debt that is outstanding in the banks is guaranteed by the government in Ireland.
“Achieving the right balance between realism in what can be collected and prudence in managing the limited but adequate capital resources that have been provided to the banks by the government is vital,” Honohan said. “Failure in this regard would press on the already fragile finances of the state.”
$1 = 0.7677 euro Reporting by Lorraine Turner and Conor Humphries; Editing by Diane Craft